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Tuesday, October 11, 2016

Analysts: Oil Rally is Here, But Don't Expect it to Last

From Morningstar:

Crude markets have tightened a good deal in recent months, as strong demand growth and supply issues have pulled forward industry recovery by about a year, relative to our previous outlook. Fundamentals after 2017 are looking particularly bullish for prices, and an oil price rally in 2018 is looking more likely.

Industry conditions begin to look much stronger post-2017, as a collapse in new nonshale capacity additions and growing demand could lead to meaningful supply shortages. We are increasingly bullish on oil prices rallying in the medium term, and have raised our WTI forecast to $65/bbl for 2018, which is the level we believe is required to drive a large-scale recovery in U.S. shale activity.

Even so, the strength of U.S. shale is lurking beneath the surface: Our analysis shows that the recent uptick in rigs and falling shale decline rates together are enough to stabilize U.S. crude production within six months. Remarkably, if activity isn't scaled back, U.S. production will begin growing in 2017 (albeit barely). This underscores the strength of U.S. tight oil: Should a price rally ensue, it is far too strong to not overheat and eventually snuff out any future oil price rally. We remain bearish on oil prices for the longer term, and we reiterate our midcycle oil price outlook of $55 WTI ($60 Brent).

Sharp curtailments in oil-directed drilling activity could reduce U.S. natural gas production growth in the near term, but the wealth of low-cost inventory in areas like the Marcellus and Utica ultimately points to continued growth through the end of this decade and beyond.